Time to sell NS&I's inflation-proof bonds?

Inflation may be falling but savers are wise to ignore 'better’ returns

They may be jumping the gun but experts are already warning that Britain’s inflation problem may be replaced by a threat of deflation.

Christine Lagarde, who heads the International Monetary Fund, has said increasing risks of falling prices could prove “disastrous” for the global economy.

Some British fund managers are concerned. Caspar Rock of Architas, said: “[Rising] inflation is not a concern for me at the moment as I cannot see the catalysts for why the Bank of England would encourage inflation when it needs to keep rates low. Deflation is arguably more of a concern.”

So should savers who are in the fortunate position of having money in popular National Savings & Investments Index-linked Savings Certificates roll over their investment for another three or five years?

These bonds are seen as a an excellent store of the value of your money, as they grow with the rise in the cost of living. But they only beat other investments if inflation notably high – and the official measure, the consumer prices index (CPI), has fallen from 2.9pc to 2pc in a year.

Some holders of these investments, once described by M&G’s respected fund manager Jim Leaviss as a “deliberate subsidy for the rich”, have expressed concern that the returns are lower than when they first took out the certificate three years ago. In May 2011 the certificates paid 0.5pc above the retail prices index (RPI), but the latest issue offers just 0.05pc above this measure on both the three and five-year versions.

We spoke to a number of financial planners to establish whether savers should instead look to alternatives such as high-yielding shares in the FTSE 100.

Most experts said savers would be foolish even to consider cashing in now.

Danny Cox of fund broker Hargreaves Lansdown said only under exceptional circumstances, such as in the event of having a significant amount of debt to clear, should savers opt out of rolling over the certificates.

“In the vast majority of cases savers should roll these over at maturity as index-linked certificates are the only way you can guarantee your savings rise faster than the rate of inflation with 100pc security and no tax to pay,” he said. “Savers should ignore short term falls in inflation and hold for the long term.”

David Penny, an adviser at Somerset-based Invest Southwest, said: “The fact that the certificates were so oversubscribed when they were last marketed is indicative of their attractiveness to many investors, particularly higher rate taxpayers. So rolling over will make sense for many people.”

He said only those savers who have a higher risk appetite should consider alternatives. This might include dividend shares such as AstraZeneca and GlaxoSmithKline. With this added risk comes potential reward, as these shares may achieve better returns in the long run – but there is no guarantee.

“Pretty much every other option to beat inflation includes taking on extra risk,” he said.

Other financial planners said savers might consider other investments if inflation stays low for some time.

Joss Harwood, a financial planner at Eldon Financial, said: “One way of looking at this is weighing up whether you plan to buy something with the cash. If the price of that good or service is likely to rise more quickly than the rate of growth on the certificates, then it might make sense to purchase now, rather than rolling over the bonds for several more years.”

He added: “If the tranche of cash is just going to sit there for some time being systematically rolled over then there is a case for considering other assets such as shares, either as an investment, or, looking even longer term, into a pension to generate future income.”

Put a question to the experts: moneyexpert@telegraph.co.uk

What are NS&I Index Linked Certificates?

The investments guarantee to beat retail price index (RPI) inflation every year. They are free from UK income tax making them attractive to taxpayers, particularly higher rate taxpayers, and are backed by the Treasury so are considered safe.

How do they roll over?

Until September 2012 NS&I allowed savers holding Fixed-Interest Savings Certificates, also tax free, to switch to an Index-Linked Savings Certificate on maturity. Since then though this offer has been withdrawn and will remain so unless Index-Linked Savings Certificates go on general sale again, which looks unlikely.

Existing investors in the Index-linked Savings Certificates can continue to reinvest on maturity of their terms.